Meeru's Analysis

[Meeeru]

XAU/USD: gold is cheaper amid verbal interventions. Fundamental analysis for 22.08.2016


Last week's statements of a number of Fed officials indicating that there is a high probability of raising interest rates in the US in the coming months, contribute to the strengthening of the dollar on the foreign exchange market and the weakening of prices for precious metals, including gold.

After the release on Wednesday of the minutes of the July meeting of the Federal Open Market Committee (FOMC), the dollar dropped massively on the foreign exchange market. The minutes showed that there is no consensus between the leaders of the Fed about monetary tightening in the US in the coming months. The Fed did not take on the obligations regarding the rate increase, making it clear that it will depend on the incoming US economic indicators.

However, on Friday, the US dollar regained some of the previously lost positions after the two representatives of the Fed's management made statements that strengthened expectations of an increase in key interest rate this year. On Tuesday, President of the Federal Reserve Bank of Atlanta Dennis Lockhart said he did not rule out a rate hike in September. "Next year we will raise rates twice or even more," said Dennis Lockhart. Also Tuesday, President of the Federal Reserve New York William Dudley said that the central bank is close to the point where it will have to hike the rates.

The statements by President of the Federal Reserve Bank of San Francisco John Williams he had made on Thursday that the central bank should start raising interest rates "sooner rather than later", supported the dollar on Friday. December COMEX gold futures on Friday closed down 0.8% at 1346.20 dollars per troy ounce.

Rising interest rates usually puts pressure on gold, because in this case interest earning assets are becoming more popular. A stronger dollar also makes gold, whose prices are denominated in US currency, less attractive for holders of other currencies as the cost of borrowings for its acquisition and storage grows.

The Fed's Vice Chairman Stanley Fischer on Sunday was also optimistic about the short-term outlook, saying that the 2% inflation target is "at a stone's throw", and economic growth, according to his expectations, will "accelerate" over the next few quarters.

Fisher's comments also led to increased expectations of the Fed Chairman Janet Yellen's speech to be held at the Fed conference in Jackson Hole this week. If J. Yellen gives a hint of the possibility of a rate hike in September, the dollar will strengthen sharply on the currency market.

However, the remaining risk associated with the state of the global economy, as well as lower interest rates in a number of the world's central banks with the prospect of further easing of monetary policies will support the gold price.